Disadvantages Of An Adjustable Mortgage Rate

By Author: Christopher Carter
Total Articles: 512
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AN ARM (Adjustable Rate Mortgage) has several disadvantages, and they should all be considered before going into a home loan deal with this specific program. If you are on a tight budget, then is definitely not for you. Payments can increase month to month.

Payments can vary month to month by a couple of hundreds of dollars to thousands, depending on your program. Your rate is adjusted with inflation. That means when the FED increases their rates... your payments go up, up up!

The only way to really win in an ARM program is to pray that interest rates go down, WHILE your home value goes up. History has show these two events rarely occur at the same time. On one hand if your home values are going up, that mean sellers are selling at a higher rate, and buyers are getting hit hard with fees and high interest rates since it is a seller's market. If interest rates are going down, that means there are more buyers out there than there are sellers. This in return drives home prices up. Well that's your idea goal right? Wrong. Notice I said home prices, not the value of the homes. If you are buying a $600,000 home, in a ...
... neighborhood that the average value is 400,000, guess what, you're paying too much. Now if you are the seller you are skipping to the bank with your extra money, but if you are a buyer you will soon find that you paid too much for your home, once home values level off.

A huge problem that most borrowers have with an ARM is the 5 year surprise. What's the 5 year surprise, well when you sign a traditional ARM, you pay as little as possible for the first 5 years, and no FED interest rate is calculated. Then after 5 years, the Adjustable Interest Rate program starts, and now your monthly mortgage payments include the FED's interest rate. So you can potentially be seeing quadruple monthly payments, and your payments can continue to increase month after month if the interest rate increases.

If you plan on being in your home for over 5 years, the best bet is you want to build equity into your home, which an Adjustable rate mortgage's low payment plan prevents you from doing.

An Adjustable Rate Mortgage is best if you are planning on just investing in your home, and don't plan on staying in it for more that 5 years. You are gambling that the home values will go up, and you can cash out before the program comes due. Millions of people have try playing this game, and you really don't want to. The simple fact is that the financial game is not to be played with when you consider it is your family's financial stability that you are gambling with when you choose an ARM home loan program. Think long and hard on how you are going and calculate if you will be able to financially pay a monthly varying payment.

Another disadvantage of an ARM is that you can not set a proper financial budget for you and your family. Since the next monthly's payment is going to be a guess you could find yourself in deep water, in cases of emergency. It is very difficult to create a long term financial budget on an ARM home loan program.

If you are on a tight budget your best chance is to explore a fixed mortgage rate. Most borrowers feel comfortable with a simply easy predictable monthly mortgage payment.

There are several only resources that can help you find a perfect low fixed mortgage rate. Do your research. Make sure the company you are dealing is with the Better Business Bureau, A rating with the BBB, and are reputable.

Currently it is time for home owners with ARMs, and even fixed rates to start shopping for a new lower fixed mortgage rate. Overall mortgage applications for ARMs have declined; they have reached their lowest point since 2003 of March.